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Weekly market guide

MARKETS & INVESTING
May 27, 2022

 

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.

Short-Term Summary:

After selling off ~16% over the past two months and reaching bear market territory, the S&P 500 is attempting to bounce from oversold levels. A few technical indicators we monitor support a continued rally in the short-term.

  • High yield 5-year CDS spreads (“insurance” on corporate bonds), which have shown a strong inverse correlation with the S&P 500 year to date, are breaking below their recent trend line. Remember, increasing HY CDS spreads are a sign that bond investors are getting nervous about the economy. The only other time this has occurred this year was in March when the S&P 500 rallied 11% in 11 days.
  • We are also encouraged by a positive MACD cross, which can often be an indication of short-term momentum. Given the overall down-trend for the equity market, the sign is not a “game-changer” for the general trend but is another indicator supporting a short-term bounce for stocks.
  • Additionally, we have been waiting for a “thrust” in advancers vs. decliners as indication of higher conviction from investors in buying the pullback. Earlier today, we saw this at ~8x advancers vs. decliners though it moderated by the close to ~5x- still positive and the strongest reading this year, but more indicative of our view that we are likely not “out of the woods” yet.

The bounce (within a dominant declining trend) is developing as the market seizes on messaging from the Fed that a pause could develop after two more rate hikes. The recent equity market weakness is likely a contributor to this “less-hawkish” messaging. For example, the Nasdaq has only exceeded its current stretch below the 200-DMA (-20% now) during one period (2008-2009 financial crisis) in the past 15 years. Hence, a bounce was due.

However, there remains much uncertainty regarding inflation, which will ultimately be a significant influence on the path of the Fed. Consequently, it will be a large determinant on whether or not the market lows have been seen, along with the timeline for equities to rebuild themselves for renewed upside. And investors will remain hyper-sensitive to inflationary data points moving forward, as its trajectory results in a wide range of potential outcomes over the coming months.

Accordingly, we are treating this as only a bounce for now. Nonetheless, there is plenty to do as the market rallies. Traders can finally play the long side. We suggest using high-beta stocks, which can see meaningful price moves from depressed levels. Longer-term investors can accumulate favored, quality names; and consider lightening holdings they desire to reposition in the rally. Also, watching how certain stocks and sectors trade during the bounce will help formulate positioning for the inevitable elongated rally that stocks will see on the other side of the current weak trend, regardless of where or when the market finds the ultimate low.

Also Highlighted in This Week’s Report:

  • High Yield Credit Default Swaps
  • Advancers vs. Decliners
  • Distance From 200 DMA- Nasdaq and S&P 500
  • Homebuilders

 

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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

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